Stem's Software Pivot Gains Traction as Margins Inflect, but the Stock Remains in Freefall
Q2 2026 shows record gross margins, positive EBITDA, and international expansion — yet the market cap is under $80M and the shares have lost 97% from peak.
STEM · Earnings Call · 2026-08-12
From Hardware to Software: The Inflection Takes Hold
Stem, Inc. reported its second quarter of 2026 on August 12, and the numbers tell a story of a company finally executing the strategic pivot it announced a year ago. “The second quarter marked our fifth consecutive quarter of positive adjusted EBITDA.” — Arun Narayanan, Chief Executive Officer · 2026-08-12 The company has been systematically de-emphasizing low-margin battery hardware resale in favor of software, services, and edge hardware. The result: “Non-GAAP gross margin reached a record 55%, up from 49% in the second quarter of 2025.” — Brian Musfeldt, Chief Financial Officer · 2026-08-12 This margin expansion is remarkable given that total revenue declined 12% year-over-year to $34 million — but that decline was almost entirely due to battery resale, which fell from $5 million to just $300,000. Excluding resale, software and services revenue actually grew 1%.
The operational leverage is now visible in the cash flow statement: “Operating cash flow was positive $300,000 in the second quarter” — Brian Musfeldt, Chief Financial Officer · 2026-08-12 — a $22 million improvement year-over-year. This is the first quarter of positive operating cash flow in the company's recent history, and management expects it to build through the second half of the year. The company also trimmed cash OpEx 11% year-over-year, even as it invests in growth areas.
Our operating leverage story continues to build. Five straight quarters of positive adjusted EBITDA, a second consecutive quarter of record non-GAAP margins, and operating cash flow at breakeven, all without pulling back on investment.
However, the revenue decline is stark. Total revenue has fallen from $115M in Q4 2023 to $29M in Q1 2026, a 67% drawdown, as Stem deliberately scaled back battery hardware resale. The pivot is working at the margin level, but the top line is still shrinking, and the market has punished the stock accordingly — it is down 97% from its 2021 peak and 39% in just the last 90 days.
Global Ambitions: PowerTrack EMS Goes International
Beyond cost discipline, the real growth narrative is PowerTrack EMS. The company announced two new bookings this quarter: a Latin America entry with the Granja Solar Project in Chile (a 420 MWh battery system) and a hybrid project in Hungary with Solarmarkt Group. This follows the product's launch in September 2025 and its first European bookings earlier this year. As Arun Narayanan noted, "PowerTrack EMS is now booked across three continents." The momentum is building: "We see real potential to extend this delivery model across additional projects in Latin America."
This international push is entirely new for Stem, which historically focused on C&I solar monitoring in the U.S. In the Q1 2026 call, Arun had already highlighted the product's importance: “PowerTrack EMS is the key differentiator that allows us to provide our customers in the utility scale space with solutions.” — Arun Narayanan, CEO · 2026-05-07 And in the Q4 2025 call, he laid out the patience required: "PowerTrack EMS was launched in September 2025... it is the first time we are able to address a solar and storage solution and address a customer's need completely." The bookings are now converting to live projects — the Everyray project in Germany is operational, and the Chilean system should be online later this year.
The company is also targeting the utility-scale market aggressively, with bookings up 40% sequentially. The hybrid model — where existing solar sites add storage and use PowerTrack as the control system — creates two sources of ARR per site, as Erin Reed explained. This subscription-like recurring revenue is exactly what the market wants to see.
AI and the Next Growth Wave
Stem is also leaning into AI. The company officially launched AIONA, its AI services offering, in June and already has customer workshops underway. PowerTrack Sage, the AI assistant inside PowerTrack, continues to show strong adoption. On the Q1 call, Arun had said: "AI is baked into PowerTrack as PowerTrack Sage... it provides customers with more fluency to interpret their site data." This is a natural extension of their software-centric strategy and could lead to both retention and expansion.
The company is also exploring how its energy optimization software can serve data center developers. This is a nascent opportunity, but it taps into the massive global trend around AI infrastructure and power demand. Given Stem's expertise in energy management, this could be a meaningful growth vector in 2027 and beyond.
Risks Remain: Leverage and the Market's Skepticism
Despite the operational progress, Stem is not out of the woods. The company's balance sheet still shows leverage: liabilities-to-assets ratio stands at 1.94 (up from 0.97 in 2019), reflecting the debt load from the 2025 exchange. Cash and equivalents improved modestly to $38.4 million, but the company continues to use its ATM to raise equity, which dilutes existing shareholders.
The stock price tells a sobering story: the full history shows a peak of $999.40 in February 2021 and a current price around $5.70, a 99% drawdown. Even the recent 90-day trend is down 39%, with no sign of a bottom. The market is essentially pricing in continued revenue decline and execution risk on the international expansion.
Still, the fundamentals are inflecting exactly as management promised. If the company can sustain its record gross margins and grow PowerTrack ARR double-digit, the operating leverage could eventually offset the revenue drag from battery resale. The next two quarters will be critical as the company guides for $140M-$190M full-year revenue, with adjusted EBITDA tracking toward the high end of $10M-$15M.
For now, Stem is a classic small-cap turnaround: heavy leverage, deep drawdown, but with concrete signs of improvement in margins, EBITDA, and cash flow. The question is whether the market will reward the pivot before the cash runs out.